Stock Option Scandal Not Over

$468 Million Levy Doesn't End Case For Mcguire

Even a $468 million settlement doesn't end Dr. William McGuire's troubles in the UnitedHealth Group stock option scandal - or the company's potential liability.

The groundbreaking agreements announced Thursday with McGuire, the company's former chairman and chief executive, will resolve civil allegations by the Securities and Exchange Commission and a massive shareholder case over manipulation of stock options called backdating. But other shareholders are pursuing litigation, the SEC's investigation is continuing, and the outcome of a federal criminal probe is uncertain.

The backdating scandal involves scores of companies that allowed executives to pick grant dates for stock options, which would guarantee them profits. An option allows a person to buy a share of stock at a fixed price - normally the market price on the day the option was actually granted. An option is worth something only if the market price of the stock rises.

However, from at least 1994 through 2005, McGuire picked grant dates that coincided with historically low quarterly closing prices for UnitedHealth's stock, ensuring his options would yield profits, according to the SEC.

Thursday's settlements were hailed Friday as landmark developments for their size, scope, and message to America's businesses.

The SEC said its settlement with Minnesota-based UnitedHealth is its first with an individual under a provision of the 2002 law reforming business practices known as the Sarbanes-Oxley Act. The provision allows executives to be deprived of stock-related profits and bonuses they earned while their companies misled investors.

The settlements with McGuire and other former and current executives and a former director will total roughly $900 million in recovery for the company, Connecticut officials say.

Connecticut Attorney General Richard Blumenthal called the UnitedHealth-McGuire matter a "Mount Rushmore type" of case.

"For corrupt corporate executives, it will be forever enshrined as a statuesque shorthand for 'This guy really was bad. This guy really abused his position,' " Blumenthal said in an interview. "And finally the shareholders, the directors, the SEC, all of them caught up with him. The posse finally grabbed him and he was made to pay, and I think it will raise the bar."

During his 17-year tenure, McGuire led the transformation of UnitedHealth from a $600 million regional insurance company to a $70 billion global health services company. The Connecticut Retirement Plans and Trust Funds - state employees' pension funds - was a lead plaintiff in shareholder litigation covered by the proposed settlement, which is subject to court approval.

The settlement would resolve shareholder "derivative" cases against UnitedHealth executives and the company in Minnesota federal and state courts. At least seven lawsuits were combined into the federal court case. In derivative cases, shareholders don't seek monetary damages for themselves, but request reimbursement to the company.

McGuire, who didn't admit or deny allegations, agreed to reimburse UnitedHealth for all incentive and equity-based compensation he got from 2003 through 2006, totaling about $448 million including option exercises and sale of company stock. He will "disgorge ill-gotten gains" of nearly $11 million and $1.7 million in interest. He will also pay a $7 million civil penalty levied by the SEC - its largest by far in an options backdating case.

McGuire previously repaid about $198 million by repricing options. He is also surrendering about $91 million of supplemental retirement benefits, and $8 million in his executive savings plan account.

"The guys in corporate executive suites may not care about the shaming or the bad publicity so long as they walk away with hundreds of millions of dollars," Blumenthal said. "But forcing them to pay back can get attention, and hopefully that will have a very sobering effect.......a powerful deterrent effect."

Executives are being forced to pay back UnitedHealth because backdating increases the company's expenses for compensation. UnitedHealth had to reflect $1.5 billion of errors in accounting for stock-based compensation when it restated 12 years of financial statements last year.

That puts pressure on a public company to make up for the hit to earnings, and the result could be higher premiums than might otherwise have been charged, or expense-cutting at the company, Blumenthal said.

Although the settlement would end shareholder derivative litigation on UnitedHealth backdating, it doesn't resolve a case by shareholders seeking damages in a Minnesota federal court. That case is a consolidation of seven proposed class actions, and the California Public Employees Retirement System is lead plaintiff.